3 things investors should watch as the UK prepares to leave the EU

Thomson Reuters
The results of the Brexit vote last year took many investors by surprise. As Britain's decision to leave the EU becomes reality, we look at some key areas of impact.

1. Trashed sterling (not all bad news though)

The damage to sterling occurred immediately after the referendum result was known with a 10% fall against the US dollar in the week following the result. It has fallen even further now - down 16% from 23 June close (and down 10% versus euro).

This is not all bad news. As global equity investors based in the UK, we have enjoyed a good uplift in our overseas investments - many of which are of course UK quoted companies.

The FTSE World index since 23 June 2016 has returned about 14% in local currency terms - but 32%2 in sterling terms. This is a significant return for investors.

2. Boosted inflation

The brief spat between Tesco and Unilever over the price of Marmite last autumn is an augur of what is to come.

The full effect of weaker sterling is yet to be felt, as costs begin to rise through the supply chain and suppliers seek to protect their margins and share the pain with consumers.

The Consumer Prices Index (CPI) rose to 1.8% in January, compared with 0.5% in June last year. There are further increases to come, no doubt.

If sterling stabilises at current levels, the higher inflation rate will fall away after a year and the Bank of England may ignore the brief blip in prices. If not, interest rates will have to move higher.

3. Elevated uncertainty

The politics of Europe has been shaky for years, but Brexit adds a new dimension to Europe's uncertain economic outlook, in particular for the UK.

Any benefit to the UK's export competitiveness from a weaker sterling could be completely negated if Europe plays hardball over market access post Brexit.

That's why I believe that a global portfolio offers a distinct advantage over single country or regional portfolios. Political and economic surprises occur and there are always winners and losers; managing a global portfolio means that I am free to invest in companies that I believe will succeed in the prevailing conditions, irrespective of their geography - and this flexibility offers some potential insulation for shareholders.

Tom Walker is a Portfolio Manager at Martin Currie, a Legg Mason affiliate. His opinions are not meant to be viewed as investment advice or a solicitation for investment.